Income Tax - How it works (a users guide)

In the run-up to the upcoming UK general election, I have had quite a few interactions on social media with people discussing the various tax policies of the main parties. It has been quite clear to me, and on more than one occasion directly pointed out to me, that most people really don't understand how our current Income Tax system works, let alone the proposals in the manifestos. So, as ever I'm here to help (and also to hopefully help as many people as possible without having a million-and-one Twitter conversations to achieve it!).

Income Tax

• At the moment you all get a £12,500 personal allowance before you pay any Income Tax;
• After that, the next £37,500 is taxed at 20%. So, your maximum Income Tax bill is £7,500 if you earn £50,000 a year (we'll come on to National Insurance later);
• Above £50,000 (that's your £12,500 personal allowance and £37,500 20% band), you'll pay Income Tax at 40% (but only on everything above that figure);
• If you're fortunate (or unfortunate in tax terms) to earn above £100,000 a year, then you lose your personal allowance by £1 for every £2 you earn above £100,000. This creates an effective 60% Income Tax rate between £100,00 and £125,000;
• Between £125,000 and £150,000 you're back to paying just 40% Income Tax on that slice of income; and finally
• Above £150,000 you will pay 45% Income Tax.

Footnote: there are different rates of tax for dividends (7.5%, 32.5%, and 38.1%), and there are other Income Tax reliefs.

So, as you can see our current Income Tax system is about as clear as mud, and that's before we've even got on to National Insurance...

National Insurance

Unfortunately, despite many promises, the National Insurance (NI) system has never quite been aligned to Income Tax. However, it is somewhat simpler than Income Tax:

• On your first £8,632 you pay no NI;
• Between £8,632.52 and £50,024 you pay NI at 12%; and
• Over £50,025 you pay NI at 2%

Footnote: there are different rates for the self-employed, and if you take your remuneration from your business as a dividend there is no NI on that.

So, assuming you're an employee (things are a little for the self-employed/company owner) that's how tax works. Unfortunately, there seem to be a lot of people out there who think when you breach a certain tax band you pay that rate on all your income, not so my friends...

Finally, Labour's 45% above £80,000. How much difference will it make? Well, for every £1,000 over the threshold you earn you'll pay an extra £50 a year, or 96p a week. Doesn't even buy a cup of coffee does it? If you're lucky enough to earn £100,000, then it'll cost you £1,000 a year, or £19.23 a week (about the cost of a McDonalds for a family of four). Not as horrendous as it sounds when you think about it...

Who can you Trust?

You want to give someone a gift, let's say its for their birthday. After considering what to get them you grab your electronic device of choice, mine would be my iPhone (other mobile devices are available), and log in to your favourite online retailer "wesellstuff.com". After making your selection you pop in the recipient's address and pay for your gift. Usually, within 24 hours it's delivered to the intended recipient and you get a little notification to say it has arrived.

A normal commonplace transaction and series of events yes? Now, I hope you'll bear with me as I haven't taken leave of my senses (yes I know this is a "tax" blog), but there is a reason for my little story above, and it relates to the use of trusts...

You have trusted "wesellstuff.com" to take your money and send your purchase to the chosen recipient. However, because they're on holiday it got delivered to the neighbour, who then forgot about it. Or, the delivery driver left it behind the bushes by the front door and a passerby decided to help themselves to it. What I'm trying to illustrate is that your intended gift could have ended up in the wrong hands, or have disappeared altogether.

So, let me get back onto the subject of tax planning and the use of trusts. My little story hopefully illustrates why people use trusts. When we're helping clients with inheritance tax planning we're not talking about a £10 book or DVD, we are talking about gifts of tens sometimes hundreds of thousands of pounds. Imagine that ended up in the wrong hands or being lost because of circumstances outside of your control!

Now some will say that I am being sensationalist, but I really am not:

• Let's say you gift £50,000 to your daughter for her and her boyfriend to buy their first house. Like most people, they choose the cheapest option for their legal work and they end up buying it as joint tenants. Tragically your daughter passes away, and because she bought the property with her boyfriend as joint tenants he inherits her half share, which by the way includes your £50,000 gift. 
• Alternatively, you make a gift of £50,000 to your son to help him set up his own business. After a couple of years, it turns out not to be the roaring success that he hoped it would and he files for bankruptcy. Again, your £50,000 is gone and there's nothing you can do to get it back.
• Finally, as in my first example, you gift £50,000 to your child (who is married), and within a couple of years they divorce and their ex-spouse takes half of the gift you made as part of the legal settlement.

All of these are very real examples that I have come across in practice that leave the donor (i.e. YOU) with absolutely no control or recourse regarding the gift they made to help their child. I could tell many more involving people going off the rails, developing drink and/or drug problems, suffering from life-changing illnesses. In every single one of these instances, the position could have been very different if the parent in question had made the gift to their child by using a trust because a trust creates a sort of legal limbo between the person making the gift and the one receiving it. The effect of this is to create a situation where your intended beneficiary can have the use and enjoyment of the trust assets, but they do not legally own them in their personal capacity.

I really do wish that our current lawmakers and media would understand why trusts are used. These days they have almost become a byword for tax avoidance and corruption. Anyone with a trust is viewed suspiciously by the collective. Why is this I ask myself, and I can only conclude because it furthers a political narrative. The vast majority of people use trusts to PROTECT not to AVOID!

Ever wonder where your tax goes? Well, let me tell you

Have you ever wondered where your income taxes go? Well, the good news is that if you have a personal tax account (it's easy enough to obtain one, see here) you can. However, to save you good people the trouble, I went and looked at mine. This is on a percentage basis how my taxes got spent (everyones should be the same):

Description	2017-18	2016-17	2015-16	2014-15	Avg.
Welfare	23.8%	24.3%	25.0%	25.3%	24.6%
Health	19.9%	20.3%	19.9%	19.9%	20.0%
State Pensions	12.8%	12.9%	12.8%	12.8%	12.8%
Education	12.0%	12.3%	12.0%	12.5%	12.2%
National Debt Interest	6.1%	5.5%	5.3%	5.0%	5.5%
Defence	5.3%	5.2%	5.2%	5.4%	5.3%
Public Order and Safety	4.3%	4.2%	4.3%	4.4%	4.3%
Transport	4.3%	4.2%	4.0%	3.0%	3.9%
Business and Industry	2.9%	2.5%	2.4%	2.7%	2.6%
Government Administration	2.1%	2.1%	2.0%	2.0%	2.1%
Culture	1.6%	1.6%	1.6%	1.8%	1.7%
Environment	1.6%	1.6%	1.7%	1.7%	1.7%
Housing and Utilities	1.6%	1.5%	1.4%	1.6%	1.5%
Overseas Aid	1.2%	1.1%	1.2%	1.3%	1.2%
UK Contribution to the EU	0.7%	0.7%	1.1%	0.6%	0.8%

I have shown the percentages for the last four years, and it throws out some interesting results. Largely the biggest shocker is that the percentages stay pretty stable over the four years, although there are a couple of culprits that seem to deviate from the average, principally spending on welfare and national debt interest.

HMRC helpfully also published a paper in November 2018 detailing how much tax they've collected (it can be found here), it really is a great cure for insomnia, I recommend it. However, if you just want to know how much tax the government collects check out page 4. Interestingly the "tax take" has been increasing year on year for some time. To get another idea of just how many different types of tax there are, you could do worse than looking at the Taxpayers Alliance.

I don't intend to draw any political conclusions, that's not my place (I'm a tax advisor after all, not a politician), but I will leave you all with one Brexit related fact though. The median annual income in the UK, according to the most recent Annual Survey of Hours and Earnings, is £28,677 for full-time employees. This means the average tax for an employee is £5,640. So, on average the EU gets £45.12 a year from your taxes...

Tax! What can you do about it?

Yes, I know it is tax return silly season. Yes, I know I should be spending my valuable time filing tax returns. So, why have I decided to write this blog? Well, believe it or not, it has actually arisen from having looked at so many tax returns lately. It never ceases to amaze me that every year I will have clients ask me what they can do to reduce their tax bill. For last year. In January. Oh, how we laugh...

Of course, we all know that the tax year ends on the 5th of April. Your tax return and payment of tax has to be dealt with by the following 31st of January.

Therefore, if I'm helping you file your tax return in January we're already nine months beyond the end of the tax year. So, if you're thinking about making that big pension contribution, or buying that new van, it's a bit late for us to offset it against your tax for last year, unless of course your tax adviser also happens to be Gandalf the Grey.

As with all things, there are of course some clever things we can suggest, like Venture Capital Trust (VCT) or Enterprise Investments Scheme (EIS) investments. Well, we can suggest them, but you'll need an IFA to do them. So, again it's unlikely anything can be sorted out in the dying days of January.

So, the point I'm trying to make (through the fog of a tax return induced migraine), is that rather than wait for the orcs of Mordor, sorry I mean the inspectors of HM Revenue & Customs, to come knocking on your door on the 31st of January you might be better seeking the help of your local friendly tax adviser before they arrive. So, to avoid an invasion of the forces of darkness (HMRC), best have that chat before the 5th of April...

Don't delay, file your tax return today!

Great to see some tax-related news from the BBC that's reasonably accurate today. Yes, I'm talking about tax return filing behaviour in the UK. If you want to take a look at their article it can be found here https://bbc.in/2M3QOIq courtesy of BBC News.

What's interesting though is that HMRC published this information on 1 February 2018 (https://bit.ly/2Fz7pzs courtesy of HMRC), although I suppose I should still applaud the BBC for bringing the plight of all of us humble tax practitioners to light.

Perhaps, at last, our clients will understand why we look like zombies at the end of January (and maybe they'll get their tax papers to us a bit sooner)!

For those who don't want to click through all the links and try to extract the facts, I'll set them out here:

• 11,433,349 Self Assessment returns were due for 2016/17
• 10,687,761 returns were received by midnight on 31 January 2018 (93.5% of total issued)
• Around 745,588 Self Assessment returns were still outstanding on 1 February 2018
• 9,916,430 returns were filed online (92.8%)
• 771,331 returns were filed on paper (7.22%)
• more than 4,852,744 returns were received online in January 2018 (44.8% of the total received)
• 1,290,948 returns were received on 30 and 31 January 2018 (26.6 % of total returns received in January)
• busiest hour: 4pm to 5pm on 31 January 2018 – 60,596 returns received (1,010 per minute; 17 per second)
• 389,849 payments transactions were handled on 31 January 2018

The really surprising thing is, go and apply these stats to your owns clients, you'll find those percentages are not far out. At the time of writing this, we're still waiting for about 25% of our clients to send us their tax information...

Have a productive January 2019 folks!

January Madness!

No, I'm not talking about the slow recovery from imbibing too much alcohol over Christmas and New Year, or even the sadomasochistic post-Christmas diet and exercise regimen, of course, I am talking about the final run-in to the 31 January! It's that time of year again for almost everyone working in tax (I'm sure even some VAT people get drafted in to help out at this time of year).

In order to try and make this month seem a little more bearable, I thought I'd share a little bit of festive humour, here are some of the reasons taxpayers have given to HMRC for filing their taxes late in recent years:

1. My pet goldfish died (self-employed builder)
2. I had a run-in with a cow (Midlands farmer)
3. After seeing a volcanic eruption on the news, I couldn’t concentrate on anything else (London woman)
4. My wife won’t give me my mail (self-employed trader)
5. My husband told me the deadline was 31 March, and I believed him (Leicester hairdresser)
6. I’ve been far too busy touring the country with my one-man play (Coventry writer)
7. My bad back means I can’t go upstairs. That’s where my tax return is (a working taxi driver)
8. I’ve been cruising around the world in my yacht and only picking up post when I’m on dry land (South East man)
9. Our business doesn’t really do anything (Kent financial services firm)
10. I’ve been too busy submitting my clients’ tax returns (London accountant)

Source: https://www.gov.uk/government/news/revenue-reveals-top-10-oddest-excuses-for-late-tax-returns

Whilst I know some of these are getting old now, they're still quite amusing.

However, the matter of late filing is still very serious for the taxpayer (as well as being a post-Christmas headache for us practitioners). Of course, I am talking about HMRC's penalty regime:

• £100 – applied immediately the return is late;
• £10 per day – charged once the return is 3 months late for a maximum of 90 days;
• the higher of £300 or 5% of the tax due – applied if the form is 6 months late;
• a further £300 or 5% of the tax due (whichever is higher) – applied if the form is 12 months late; and
• you’ll also be charged interest on late payments of tax.

If they are going to be late, it's always worth considering if they do have a reasonable excuse. A reasonable excuse is something that stopped you meeting a tax obligation that you took reasonable care to meet, for example:

• your partner or another close relative died shortly before the tax return or payment deadline
• you had an unexpected stay in hospital that prevented you from dealing with your tax affairs
• you had a serious or life-threatening illness
• your computer or software failed just before or while you were preparing your online return
• service issues with HM Revenue and Customs (HMRC) online services
• a fire, flood or theft prevented you from completing your tax return
• postal delays that you couldn’t have predicted
• delays related to a disability you have

Source: https://www.gov.uk/tax-appeals/reasonable-excuses

Have a great 2019 folks!

Requirement To Correct - Nobody expects...

...the Spanish Inquisition! So, what's this all about then?

Yes, I am getting rather excitable about this particular issue as it is a deadline that is now thundering down the hillside toward us.

It is also an area where a great many taxpayers will find themselves on the receiving end of a nasty HM Revenue & Customs enquiry into their affairs, and just like the Spanish Inquisition they won't be expecting it!

Much like the famous Monty Python sketch (but without the mirth) HMRC will be looking into the tax affairs of a great number of taxpayers who have done little wrong other than commit the greatest social crime of our time, owning property that is not situated in the UK! I jest I know, there are far more heinous crimes being perpetrated in the world, but with the attitude of the Treasury and HMRC you wouldn't think it. So, what's all the fuss about...

30 September 2018 – a vitally important date for all those who have, previously undisclosed offshore income and gains. This is the date by which taxpayers will have had to disclose income and gains and settled any tax liabilities arising.

So, why is this so important? – Because a number of new laws become effective from that date, not least of all the potential for penalties to double from 100 to 200% of the potential lost revenue where HMRC subsequently discover undisclosed income and gains, plus a potential further 10% of the value of the overseas assets held.

In addition, HMRC no longer has to prove there was an intention to defraud the exchequer when sending cases for criminal prosecution. Whilst it is tempting to rant about the inequity of such rules, its best to focus on not becoming subject to the higher penalty regime.

How will HMRC know about previously undisclosed assets? – From October 2017, the UK was an early adopter of the Common Reporting Standard between the UK and 90 other countries. This is essentially a financial information exchange mechanism so the chances are HMRC may already know about some assets. From 1 October 2018, approximately 127 countries will be exchanging information with the UK. It is expected that this information will feed into HMRC’s Connect system to be compared with entries on tax returns.

To summarise, the world is a smaller place from 1st October this year and the UK tax system has essentially declared war on all those who have failed to take advantage of previous offshore disclosure opportunities.  This is the last chance to do so before HMRC effectively has the right to impose the most punitive civil penalty regime in the country’s modern history (on the bright side, at least there are no red hot pokers involved).

I urge you to speak to your tax adviser (or me if you'd prefer / don't have one - fees do apply of course 😉) as a matter of urgency to make sure you are not caught by the new legislation.

Tax: A dirty word?

My career in tax has spanned almost 20 years now, and I recently had cause to reflect on how the profession has changed in the public eye. It really is rather alarming, and a lot of that change has been caused by two things in my opinion: greed and propaganda.

When I started out my career in 2000 I recall the awkward silence one experienced when being asked the question "and what do you do?". Any response almost always seemed to include statements along the lines of "but, I don't work for the Revenue" (not that there's anything wrong with that you understand), or "no, I'm one of the good guys, we save you tax", at which point everyone would usually start breathing again and ask a few interested questions.

Fast forward to 2018, and the mention that you "work in tax" tends to elicit that we are somehow responsible for all the tax schemes, avoidance, and evasion that has ever existed and very possibly we're the cause of the latest natural catastrophy! Oh well, at least we're not bankers...

So, you can see what I mean by the turnaround in public opinion in the last 20 years. Why has this happened though? Well, we really weren't helped by the sheer number of tax schemes that were put in place during this time by everyone from perfectly scrupulous advisers to some who had even less  actual knowledge of tax than their clients (yes, some parts of the tax world became like 1970's insurance salesmen).

However, despite the media shenanigans that has now largely changed. For those of us who are professionally qualified and subscribe to our professional body we are (as we always have been) bound by certain professional rules, ethics and guidelines. Those were beefed up in recent years to cover the topic of “tax avoidance” at the behest of the Treasury, and most of the tax and accounting bodies in the UK now adhere to something called PCRT (Professional Conduct in Relation to Taxation).

So, lets hope in the coming years that the media will catch up with reality and realise that tax isn’t the Wild West. Yes, there will always be unregulated providers out there, but that is the same with many things. You wouldn’t get an unregistered plumber to replace your boiler, so why would you get an unregulated tax adviser to do your tax planning? Just think on that...

Employment Related Securities - ALERT

I talk a lot about incentivising employees via a grant of shares, usually through the tax-advantaged EMI scheme. Unfortunately, there has been some bad news in the last week or so (and yes, I know I'm a little late to the table on this one, but I've been away on holiday).

According to the latest HMRC employment-related securities bulletin - which can be found here - the EU State Aid approval for the EMI scheme, expired on 6 April 2018.

Before you clasp your head in your hands in dismay, HMRC considers that the State Aid approval applies to the granting of share options and therefore that share options granted up to and including 6 April 2018 won’t be affected by this lapse of the approval.

Good news for all of you with existing schemes and options in place.

Unfortunately, EMI share options granted in the period from 7 April 2018 until EU State Aid approval is received might not be eligible for the tax advantages afforded to pre 6 April 2018 option holders, and accordingly share options granted in that period as EMI share options may fall to be treated as non-tax advantaged employment-related securities options.

However, let us take some solace in the fact that the government has, since last year, been following the process of applying to the European Commission for fresh approval and currently await the Commission’s final response.  We are assured that the government is working hard to ensure this period is as short as possible.

As a result, companies may wish to consider delaying the grant of employee share options intended to qualify as EMI share options until fresh EU State Aid approval has been given. This advice would apply even to existing schemes where new options are being granted.

If you want further advice on this please contact me at Haines Watts.

Staying ahead...

My apologies in advance, normally this blog is about tax, but I've gotten a little philosophical lately and thought I should share my musings...

As some of you may know, I am a keen (but very amateur) clay pigeon shooter. Yes, I enjoy blowing up little disks of pulverized limestone in my free time. However, whilst sitting in the audience of a recent seminar I was put in mind of how like my favourite hobby both being in business and working in tax are like...

You see, the trick with shooting a little clay disk out of the sky involves a number of skills:

• being aware of your environment
• having a clear view of your target
• following it as it moves through the air
• pulling the trigger, and
• most importantly keeping moving in the direction of travel

Whilst it is not impossible in the discipline to take a fixed shot, or even to "ambush" a target, more often than not you'll miss as a result of such behaviour.

All of this made me really think about the way we approach our businesses, as in where is that "made it" moment, and do you, as an entrepreneur, stop or keep moving? The same can be applied to a career, or even one's financial and tax planning. If you stop moving, if you stop innovating, if you stop progressing and growing, you miss what you were aiming at.

Very few things in life stay still, least of all our goals and desires in life. Keep moving and blow your goals out of the sky!